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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ------------ TO ------------
COMMISSION FILE NUMBER 1-9078
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THE ALPINE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-1620387
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE MEADOWLANDS PLAZA 07073
EAST RUTHERFORD, NEW JERSEY (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code 201-549-4400
-----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JULY 30, 2004
Common Stock, $.10 Par Value 13,091,068
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1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 and, therefore, do not include all information and
footnotes required by accounting principles generally accepted in the United
States of America. However, in the opinion of management, all adjustments
(which, except as disclosed elsewhere herein, consist only of normal recurring
accruals) necessary for a fair presentation of the results of operations for the
relevant periods have been made. Results for the interim periods are not
necessarily indicative of the results to be expected for the year. These
financial statements should be read in conjunction with the summary of
significant accounting policies and the notes to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
2
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
----------------------------
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $ 904 $ 465
Marketable securities, at fair value ..................................................... 5,659 6,761
Accounts receivable (less allowance for doubtful accounts of $330 and $263 at
June 30, 2004 and December 31, 2003, respectively) ................................ 42,345 32,328
Inventories, net (Note 4) ................................................................ 34,132 37,169
Current assets of discontinued operations ................................................ 9,682 7,534
Other current assets ..................................................................... 3,072 3,577
----------------------------
Total current assets ................................................................ 95,794 87,834
Property, plant and equipment, net .......................................................... 16,856 15,241
Assets of discontinued operations ........................................................... 1,896 1,766
Other long-term assets ...................................................................... 2,578 2,947
----------------------------
Total assets ........................................................................ $ 117,124 $ 107,788
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (Note 7) ....................................................... $ 31,680 $ 17,189
Current portion of long-term debt (Note 8) ............................................... 54 137
Accounts payable ......................................................................... 15,447 21,088
Accrued expenses ......................................................................... 8,786 11,294
Current liabilities of discontinued operations ........................................... 2,637 2,223
Deferred income taxes and income taxes payable ........................................... 8,174 7,644
----------------------------
Total current liabilities ........................................................... 66,778 59,575
Long-term debt, less current portion (Note 8) ............................................... 3,509 3,777
Deferred income taxes ....................................................................... 17,274 17,595
Other long-term liabilities ................................................................. 1,488 1,475
Warrant ..................................................................................... 1,250 1,000
Minority interest in subsidiary ............................................................. 2,849 2,686
Liabilities of discontinued operations ...................................................... 149 157
Mandatorily redeemable series A cumulative preferred stock (18,264 shares issued;
17,083 and 18,174 outstanding at June 30, 2004 and December 31, 2003, respectively)
(Note 9) ................................................................................ 5,249 5,665
Commitments and contingencies
Stockholder's equity:
9% cumulative convertible preferred stock at liquidation value ........................... 177 427
Common stock, $.10 par value; (25,000,000 authorized; 22,903,931 and 22,146,884 shares
issued at June 30, 2004 and December 31, 2003, respectively) ..................... 2,290 2,214
Capital in excess of par value ........................................................... 167,291 165,706
Accumulated other comprehensive income (loss) ............................................ (37) 57
Accumulated deficit ...................................................................... (56,866) (58,201)
Treasury stock, at cost (11,077,433 and 11,109,872 shares at June 30, 2004 and
December 31, 2003, respectively) .................................................. (93,828) (93,861)
Receivable from stockholders ............................................................. (449) (484)
----------------------------
Total stockholders' equity ............................................................ 18,578 15,858
----------------------------
Total liabilities and stockholders' equity .......................................... $ 117,124 $ 107,788
============================
The accompanying notes are an integral part of these
consolidated financial statements.
3
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
-------------------------
2004 2003
-------------------------
Net sales ........................................................................................ $ 76,678 $ 80,154
Cost of goods sold ............................................................................... 70,100 74,885
-------------------------
Gross profit .................................................................................. 6,578 5,269
Selling, general and administrative expenses ..................................................... 6,042 8,363
Restructuring and other charges .................................................................. 1,158 2,391
------------------------
Operating loss ................................................................................ (622) (5,485)
Interest expense ................................................................................. (673) (804)
Other income (expense), net ...................................................................... 228 14
-------------------------
Loss before income taxes, minority interest, equity in earnings of affiliate
and discontinuedoperations ................................................................. (1,067) (6,275)
Income tax benefit ............................................................................... 327 2,453
-------------------------
Loss before minority interest, equity in earnings of affiliate and discontinued operations .... (740) (3,822)
Minority interest in income of subsidiary ....................................................... (6) --
Equity in earnings of affiliate .................................................................. -- (806)
-------------------------
Loss from continuing operations .................................................................. (746) (4,628)
Income from discontinued operations, net of taxes ................................................ 892 854
-------------------------
Net income (loss) ................................................................................ 146 (3,774)
Preferred stock dividends ........................................................................ (139) (10)
-------------------------
Net income (loss) applicable to common stock ................................................. $ 7 $ (3,784)
=========================
Net income (loss) per share of common stock: Basic and diluted:
Loss from continuing operations ............................................................ $ (0.06) $ (0.31)
Income from discontinued operations ........................................................ 0.07 0.06
Preferred stock dividends .................................................................. (0.01) --
-------------------------
Net income (loss) per basic and diluted share of common stock .............................. $ 0.00 $ (0.25)
=========================
Weighted average shares outstanding (basic and diluted) .......................................... 12,815 15,107
=========================
The accompanying notes are an integral part of these
consolidated financial statements.
4
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2004 2003
-------------------------
Net sales ........................................................................................ $ 158,019 $ 169,508
Cost of goods sold ............................................................................... 141,253 158,452
-------------------------
Gross profit .................................................................................. 16,766 11,056
Selling, general and administrative expenses ..................................................... 12,105 17,388
Restructuring and other charges .................................................................. 2,906 4,976
-------------------------
Operating income (loss) ....................................................................... 1,755 (11,308)
Interest expense ................................................................................. (1,285) (1,852)
Other income, net ................................................................................ 145 100
-------------------------
Income (loss) before income taxes, minority interest, equity in earnings of affiliate and
discontinued operations..................................................................... 615 (13,060)
Income tax (provision) benefit ................................................................... (425) 5,125
-------------------------
Income (loss) before minority interest, equity in earnings of affiliate and discontinued
operations ................................................................................. 190 (7,935)
Minority interest in income of subsidiary ....................................................... (163) --
Equity in earnings of affiliate .................................................................. -- 267
-------------------------
Income (loss) from continuing operations ..................................................... 27 (7,668)
Income from discontinued operations, net of taxes ................................................ 1,595 1,580
-------------------------
Net income (loss) ................................................................................ 1,622 (6,088)
Preferred stock dividends ........................................................................ (287) (19)
-------------------------
Net income (loss) applicable to common stock .................................................. $ 1,335 $ (6,107)
Net income (loss) per share of common stock:
Basic and diluted:
Income (loss) from continuing operations ................................................... $ 0.00 $ (0.51)
Income from discontinued operations ........................................................ 0.13 0.10
Preferred stock dividends .................................................................. (0.02) --
-------------------------
Net income (loss) per basic and diluted share of common stock .............................. $ 0.11 $ (0.41)
=========================
Weighted average shares outstanding (basic and diluted) .......................................... 12,467 15,019
=========================
The accompanying notes are an integral part of these
consolidated financial statements.
5
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, 2004
----------------------------
SHARES AMOUNT
----------------------------
9% cumulative convertible preferred stock:
Balance at beginning of period ................................................ 427 $ 427
Preferred stock redemption .................................................... (250) (250)
----------------------------
Balance at end of period ................................................... 177 177
----------------------------
Common stock:
Balance at beginning of period ................................................ 22,146,884 2,214
Stock options exercised ....................................................... 3,166 1
Shares issued pursuant to Series A Preferred Stock conversion ................. 753,881 75
----------------------------
Balance at end of period ................................................... 22,903,931 2,290
----------------------------
Capital in excess of par value:
Balance at beginning of period ................................................ 165,706
Compensation expense related to stock options / grants net of vested shares ... 1,243
Shares issued pursuant to Series A Preferred Stock conversion ................. 340
Stock options exercised ....................................................... 2
------------
Balance at end of period ................................................... 167,291
------------
Accumulated other comprehensive deficit:
Balance at beginning of period ................................................ 57
Change in unrealized losses on securities, net of tax ......................... (94)
------------
Balance at end of period ................................................... (37)
------------
Accumulated deficit:
Balance at beginning of period ................................................ (58,201)
Net income .................................................................... 1,622
Dividends on preferred stock .................................................. (287)
------------
Balance at end of period ................................................... (56,866)
------------
Treasury stock:
Balance at beginning of period ................................................ (93,861)
Stock options and grants ...................................................... 33
------------
Balance at end of period ................................................... (93,828)
------------
Receivable from stockholders:
Balance at beginning of period ................................................ (484)
Forgiveness of officer loans .................................................. 35
------------
Balance at end of period ................................................... (449)
------------
Total stockholders' equity ....................................................... $ 18,578
============
The accompanying notes are an integral part of these
consolidated financial statements.
6
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2004 2003
-----------------------
Cash flows from operating activities:
Net income (loss) ........................................................................... $ 1,622 $ (6,088)
Adjustments to reconcile net income (loss) to net cash provided by (used for) continuing
operating activities:
Net income from discontinued operations .................................................. (1,595) (1,580)
Depreciation and amortization ............................................................ 360 355
Amortization of deferred debt issuance costs and accretion of debt discount .............. 296 253
Compensation expense related to stock options and grants ................................. 1,278 409
Deferred income tax ...................................................................... 208 (2,659)
Gain on sale of fixed assets ............................................................. (274) --
Minority interest in income (losses) of subsidiary ....................................... 163 (267)
Increase in fair value of warrant ........................................................ 250 --
Change in assets and liabilities:
Accounts receivable .................................................................... (10,016) 14,170
Inventories ............................................................................ 3,037 32,101
Other current and non-current assets ................................................... 217 (1,453)
Accounts payable and accrued expenses .................................................. (7,687) (2,292)
Other, net ............................................................................. (328) 908
-----------------------
Cash flows provided by (used for) continuing operating activities .............................. (12,469) 33,857
-----------------------
Cash flows from investing activities:
Capital expenditures ........................................................................ (2,555) (3,919)
Proceeds from sale of assets ................................................................ 681 3,364
Proceeds from sale of investments ........................................................... 1,349 1,296
-----------------------
Cash flows provided by (used for) investing activities ......................................... (525) 741
-----------------------
Cash flows from financing activities:
Borrowings (repayments) under revolving credit facility, net ................................ 14,491 (38,773)
Repayments of long-term borrowings .......................................................... (440) (44)
Other, net .................................................................................. (341) 3,030
-----------------------
Cash flows provided by (used for) financing activities ......................................... 13,710 (35,787)
Cash flow provided by (used for) discontinued operations ....................................... (277) 3,838
Net increase in cash and cash equivalents ...................................................... 439 2,649
Cash and cash equivalents at beginning of period ............................................... 465 8,139
-----------------------
Cash and cash equivalents at end of period ..................................................... $ 904 $ 10,788
=======================
Supplemental disclosures:
Cash paid for interest ...................................................................... $ 920 $ 1,937
Cash paid (refunded) for income taxes, net .................................................. $ 1,379 $ (1,323)
The accompanying notes are an integral part of these
consolidated financial statements.
7
THE ALPINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
1. GENERAL
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying unaudited consolidated financial statements represent
the accounts of The Alpine Group, Inc. and the consolidation of all of its
majority-controlled subsidiaries (collectively "Alpine" or the "Company", unless
the context otherwise requires). The Company records all affiliate companies
with ownership of greater than 20%, but not majority-controlled, using the
equity method of accounting.
Prior to December 11, 2002, Alpine's operations include the
consolidated results of its then controlled subsidiary Superior TeleCom Inc.
("Superior") and Superior's then majority-owned subsidiary Superior Cables Ltd.
("Superior Israel"). As a result of the vesting of certain Superior restricted
stock arrangements in 2002, Alpine's common equity ownership in Superior
declined from 50.2% at December 31, 2001 to 48.9%. Notwithstanding the decline
in Alpine's direct equity ownership in Superior through December 11, 2002,
Alpine had a controlling interest in Superior based on its additional indirect
equity ownership position (including certain common share voting interests
controlled by Alpine). In connection with Alpine's acquisition of Superior's
electrical wire business and DNE Systems Inc. (the "Electrical
Acquisition")--(see Note 2), certain changes were made with respect to Alpine's
indirect voting interests such that Alpine no longer controlled Superior.
Additionally, Alpine acquired approximately 47% of Superior Israel from Superior
as part of the Electrical Acquisition. Accordingly, effective for periods after
December 11, 2002, Superior and Superior Israel are accounted for under the
equity method and are no longer consolidated with Alpine.
On March 3, 2003, Superior and its U.S. subsidiaries filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code. On
October 22, 2003, Superior's Joint Plan of Reorganization, as amended and
related disclosure statement was confirmed by order of the United States
Bankruptcy Court for the District of Delaware and became effective on November
10, 2003 (the "Plan of Reorganization"). The Plan of Reorganization provided for
the cancellation of all equity and debt interests held in Superior by the
Company.
As a result of the accumulated net losses incurred by Superior, Alpine
had recorded losses in excess of its investment in Superior of $865.9 million at
December 11, 2002. This negative investment was required under accounting
principles generally accepted in the United States of America to be reflected in
Alpine's consolidated balance sheet, notwithstanding the fact that Alpine was
not obligated to fund any operating losses or deficits of Superior. Upon
implementation of the Plan of Reorganization, Alpine eliminated its negative
investment in Superior and recognized a corresponding gain of $865.9 million in
the fourth quarter of 2003. This gain was partially offset by the reversal of
$11.6 million of accumulated other comprehensive loss related to Superior
resulting in a net gain of $854.3 million.
Alpine was incorporated in New Jersey in 1957 and reincorporated in
Delaware in 1987. Alpine is a holding company which over the past five years has
held major investments in industrial manufacturing companies. Subsequent to the
Electrical Acquisition, Alpine's principal operations consisted of Essex
Electric Inc., engaged in the manufacture and sale of electrical wire and cable,
DNE Systems, Inc., a manufacturer of multiplexers and other communications and
electronic products and a 47% equity interest in Superior Israel. On June 18,
2004, Alpine entered into an agreement to sell DNE Systems, Inc. The transaction
was closed on July 29, 2004 (the "DNE Sale"). Accordingly, DNE Systems, Inc. has
been accounted for and classified as a discontinued operation in these financial
statements and prior year results have been reclassified as discontinued
operations. See note 12 for a description of the DNE Sale.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
STOCK-BASED COMPENSATION
The Company applies the intrinsic-value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations including Financial
Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25, issued in March 2000, to account for its stock-based compensation plans.
Under this method, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.
8
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements
using a fair-value based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123. The
following table illustrates the effect on net income (loss) if the fair value
based method had been applied to all outstanding and unvested awards in each
period.
THREE MONTHS ENDED
JUNE 30,
---------------------------
2004 2003
---------------------------
(IN THOUSANDS,
EXCEPT
PER SHARE AMOUNTS)
Net income (loss), as reported ........................................................... $ 146 $(3,774)
Add stock-based employee compensation expense included in reported net income (loss),
net of tax ........................................................................... 541 128
Deduct total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects .............................. (630) (159)
---------------------------
Pro forma net income (loss) .............................................................. 57 (3,805)
Preferred stock dividends ................................................................ (139) (10)
---------------------------
Proforma net loss - applicable to common stock ......................................... $ (82) $(3,815)
===========================
Net income (loss) per share:
Basic - as reported ................................................................... $ 0.00 $ (0.25)
Basic - pro forma ..................................................................... $ (0.01) $ (0.25)
Diluted - as reported ................................................................. $ 0.00 $ (0.25)
Diluted - pro forma ................................................................... $ (0.01) $ (0.25)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
--------------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net income (loss), as reported ........................................................... $ 1,622 $(6,088)
Add stock-based employee compensation expense included in reported net income (loss),
net of tax ........................................................................... 829 243
Deduct total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects .............................. (1,006) (327)
--------------------------
Pro forma net income (loss) .............................................................. 1,445 (6,172)
Preferred stock dividends ................................................................ (287) (19)
--------------------------
Proforma net income (loss) - applicable to common stock ................................ $ 1,158 $(6,191)
==========================
Net income (loss) per share:
Basic - as reported ................................................................... $ 0.11 $ (0.41)
Basic - pro forma ..................................................................... $ 0.09 $ (0.41)
Diluted - as reported ................................................................. $ 0.11 $ (0.41)
Diluted - pro forma ................................................................... $ 0.09 $ (0.41)
The effects of applying SFAS No. 123 in the pro forma disclosure are
not necessarily indicative of future amounts, since the estimated fair value of
stock options is amortized to expense over the vesting period and additional
options may be granted in future years. The fair value for these options was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions for the six months ended June 30,
2004 and 2003, respectively: dividend yield of 0% for both periods; expected
volatility of 117% and 99%, risk-free interest rate of 3.7% and 2.2%, and
expected life of two years for both periods. The weighted average per share fair
value of options granted (using the Black-Scholes option-pricing model) for the
six months ended June 30, 2004 and 2003 was $1.06 and $0.52, respectively. A
total of 151,196 stock options were granted, 15,000 cancelled and 3,166
exercised during the six month period ended June 30, 2004.
9
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee and consultant stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimates, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of such stock options.
The Company amortizes the value of the restricted stock grants evenly
over the vesting periods, based upon the market value of the stock as of the
date of the grant.
NEW ACCOUNTING STANDARD
In March 2004, the Emerging Issues Task Force (EITF) reached a
consensus on the remaining portions of EITF 03-01, The Meaning of Other -
Than-Temporary Impairment and Its Application to Certain Investments, effective
for the first fiscal year or interim period beginning after June 15, 2004. EITF
03-01 provides new disclosure requirements for other-than-temporary impairments
on debt and equity investments. Investors are required to disclose quantitative
information about: (i) the aggregate amount of unrealized losses, and (ii) the
aggregate related fair values of investments with unrealized losses, segregated
into time periods during which the investment has been in an unrealized loss
position of less than 12 months and greater than 12 months. In addition,
investors are required to disclose the qualitative information that supports
their conclusion that the impairments noted in the qualitative disclosure are
not other-than-temporary. The adoption of this EITF is not expected to have a
material impact on our results of operations or financial condition.
2. ELECTRICAL ACQUISITION
On December 11, 2002, Alpine, through Alpine Holdco Inc. ("Alpine
Holdco") a newly formed, wholly-owned subsidiary of Alpine, acquired the
following assets and securities from Superior: (1) substantially all of the
assets, subject to related accounts payable and accrued liabilities, of
Superior's electrical wire business, which is currently owned and operated by
Essex Electric Inc. ("Essex Electric"), a newly formed, then wholly-owned
subsidiary of Alpine Holdco; (2) all of the outstanding shares of capital stock
of DNE Systems, Inc. ("DNE Systems") a manufacturer of multiplexers and other
communications and electronic products; and (3) all of the outstanding shares of
capital stock of Texas SUT Inc. and Superior Cable Holdings (1997) Ltd., which
together own approximately 47% of Superior Israel, the largest Israeli-based
producer of wire and cable products. This acquisition is referred to as the
"Electrical Acquisition." The aggregate purchase price was approximately $87.4
million in cash (including $2.5 million of out-of-pocket costs) plus the
issuance of a warrant to Superior to purchase 199 shares of the common stock of
Essex Electric. The warrant is recorded as a liability in the consolidated
balance sheet and is evaluated and adjusted to fair value on a quarterly basis,
with $0.1 and $0.3 million of expense recorded in other income (expense) for the
three and six month periods ended June 30, 2004, respectively. The warrant is
only exercisable during the 30 day period prior to its expiration on December
11, 2007 or upon the earlier occurrence of certain specified transactions
generally involving a change in control of or a sale of the assets of Alpine
Holdco or Essex Electric.
In connection with the Electrical Acquisition, Alpine Holdco, Essex
Electric and Superior entered into a Supply and Transitional Services Agreement
(the "Transitional Agreement"). Under the Transitional Agreement, Essex
Electric, among other things, agreed to purchase from Superior certain specified
quantities of its overall requirements of copper rod. The specified quantities
represent a range of Essex Electric's estimated total annual copper rod
requirements for use in its wire manufacturing process. The purchase price for
copper rod specified in the Transitional Agreement was based on the COMEX price
plus an adder to reflect conversion to copper rod. The Transitional Agreement
also provided for Superior's provision of certain administrative services to
Alpine Holdco and Essex Electric. Charges for these services were generally
based on actual usage or an allocated portion of the total cost to Superior. On
November 7, 2003, the Transitional Agreement was replaced by a new supply and
services agreement between Superior Essex Inc. (the successor company to
Superior pursuant to the Plan of Reorganization) and Essex Electric (the "Supply
Agreement"). The Supply Agreement includes the supply by Superior Essex Inc. to
Essex Electric of copper rod, on similar pricing terms, for 2004 and the
provision of certain specified administrative services for a limited time in
2004. The Supply Agreement expires on December 31, 2004 but may be terminated at
any time prior to that by mutual consent of Superior Essex Inc. and Essex
Electric. Additionally, the parties may terminate various services provided for
under the agreement upon certain prior notice as provided therein. Superior
Essex Inc. may terminate its obligations to supply copper rod upon 30 days'
notice given any time after January 1, 2004 if Essex Electric has purchased less
than certain minimum quantities of copper rod, tested on a quarterly basis,
specified in the agreement. The total cost of copper rod purchased under the
Transitional Agreement and the Supply Agreement for the three and six month
periods ending June 30, 2004 and 2003 was $22.3 and $37.8 million, and $20.9 and
$59.5 million, respectively. The cost for administrative services under the
Transitional Agreement and the Supply Agreement for the three and six month
periods ending June 30, 2004 and 2003 was $0.5 and $1.1 million, and $1.3 and
$2.6 million, respectively.
10
3. ASSET SALES
In February 2003, the Company sold its plant in Lafayette, Indiana
together with the related equipment and inventory which comprised substantially
all of its industrial wire business. The total purchase price was approximately
$12.6 million in cash which approximated the book value of the assets sold.
Additionally, the Company is leasing its Orleans, Indiana plant to the purchaser
for an annual rental of $350,000. The original lease expired in February 2004
but has been extended on a month-to-month basis. The net carrying value of the
Orleans plant was $0.8 million at June 30, 2004.
In September 2003, the Company sold its plant in Anaheim, California
subject to a leaseback arrangement which, at the Company's option may extend
through December 31, 2004. The total gain on the sale was $2.6 million, $2.0
million of which was recognized in 2003, $0.2 million in both the first and
second quarters of 2004 and the remainder will be amortized in the third quarter
of 2004.
4. INVENTORIES
At June 30, 2004 and December 31, 2003, the components of inventories
were as follows:
JUNE 30, DECEMBER 31,
2004 2003
----------------------------------
(IN THOUSANDS)
Raw materials............................. $4,905 $15,358
Work in process........................... 6,909 4.417
Finished goods............................ 36,707 26,401
----------------------------------
48,521 46,176
LIFO reserve.............................. (14,389) (9,007)
----------------------------------
$34,132 $37,169
==================================
The inventories shown above are all valued using the LIFO method. An actual
valuation of inventory under the LIFO method can be made only at the end of each
year based on the inventory levels and costs at the same time. Accordingly,
interim LIFO calculations must necessarily be based on management's estimates of
expected year-end inventory levels and costs. Because these are subject to many
forces beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation. During the current quarter the company
recorded an estimated decrement of $0.9 million to cost of goods sold.
5. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the three months
ended June 30, 2004 and 2003 and the six months ended June 30, 2004 and 2003
were as follows:
THREE MONTHS ENDED
JUNE 30,
-----------------------
2004 2003
---- ----
(IN THOUSANDS)
Net income (loss).................................... $146 $(3,774)
Foreign currency translation adjustment.............. -- (8)
Change in unrealized losses on securities, net of tax (34) 92
-----------------------
Comprehensive income (loss).......................... $112 $(3,690)
=======================
11
SIX MONTHS ENDED
JUNE 30,
-----------------------
2004 2003
---- ----
(IN THOUSANDS)
Net income (loss).................................... $1,622 $(6,088)
Foreign currency translation adjustment.............. (8)
Change in unrealized losses on securities, net of tax (94) (19)
-----------------------
Comprehensive income (loss).......................... $1,528 $(6,115)
=======================
6. RESTRUCTURING AND OTHER CHARGES
During the three and six month periods ended June 30, 2004 and 2003,
the Company recorded $1.2 and $2.9 million for 2004, and $2.4 and $5.0 million
for 2003, respectively, of restructuring and other charges. The second quarter
2004 charges primarily include $0.8 million related to the relocation and
installation of certain equipment from closed facilities into the Florence,
Alabama manufacturing location, $0.2 million related to freight costs to
relocate inventory and $0.2 million in facility costs relating to idled
warehousing space. For the six month period ending June 30, 2004 the charges
consisted primarily of $1.4 million related to the relocation and installation
of certain equipment from closed facilities into the Florence, Alabama
manufacturing location, $1.0 million for costs associated with starting up the
new manufacturing processes at Florence and freight to relocate displaced
products and $0.6 million in facility costs relating to idled warehousing space.
The following table illustrates the restructuring reserve and the 2004
related activities:
DECEMBER 31, JUNE 30,
2003 CHARGES PAYMENTS 2004
----------- ------- -------- --------
(IN THOUSANDS)
Employee severance......................................... $ 972 $ -- $ (936) $36
Facility exit costs........................................ 29 556 (585) --
Equipment and inventory relocation costs and other costs... -- 2,349 (2,349) --
-------------------------------------------------
$1,001 $2,905 $(3,870) $36
=================================================
7. REVOLVING CREDIT FACILITY
In connection with the Electrical Acquisition (see Note 2), Alpine
Holdco entered into a Loan and Security Agreement (the "Revolving Credit
Facility "), dated as of December 11, 2002, by and among Alpine Holdco, Essex
Electric, DNE Manufacturing and Service Company ("DNE Manufacturing") and DNE
Technologies, Inc. ("DNE Technologies") as borrowers and DNE Systems as Credit
Party (such parties sometimes collectively are called "Companies") certain
financial institutions party thereto as lenders, Congress Financial Corporation,
as documentation agent, and Foothill Capital Corporation, as arranger and
administrative agent. The Revolving Credit Facility was last amended on December
8, 2003.
Effective concurrently with the consummation of the DNE Sale (see note
12) on July 29, 2004, the lenders, released each of DNE Systems, DNE
Technologies, and DNE Manufacturing from all of their obligations under the
Revolving Credit Facility (the "DNE Parties"), released all property of the DNE
Parties from the liens granted for the benefit of the lenders under the
Revolving Credit Facility and all of the outstanding and issued capital stock of
the DNE Parties from the pledge thereof delivered in connection with the
Revolving Credit Facility, and the DNE Parties no longer are "Borrowers" or a
"Credit Party", as the case may be, under the Revolving Credit Facility.
Accordingly, from and after July 29, 2004, the DNE Parties are not included in
the term "Companies".
Subsequent to the closing of the DNE Sale, it is anticipated that the
Revolving Credit Facility will be amended to reflect modifications in covenants
and other aspects of the Loan Agreement impacted as a result of the DNE Sale.
The terms of the Revolving Credit Facility provided for a maximum
committed amount of $100 million at its inception which, at the request of the
Companies was reduced to $70 million on December 8, 2003. Borrowing availability
is determined by reference to a borrowing base which permits advances to be made
at various net valuation rates against various assets of the Companies. Interest
is payable monthly in cash in arrears and is based on, at Alpine Holdco's
option, LIBOR or prime rates plus a fixed margin. The weighted average interest
12
rate at June 30, 2004 and December 31, 2003 was 4.9% and 4.5%, respectively. The
Revolving Credit Facility also provides for maintenance of financial covenants
and ratios relating to minimum EBITDA and tangible net worth, and includes
restrictions on capital expenditures, payment of cash dividends and incurrence
of indebtedness. Alpine Holdco was in compliance with all applicable covenants
at June 30, 2004. Outstanding obligations under the Revolving Credit Facility
are secured by a lien on all of the Companies' tangible and intangible assets,
other than the investment in Superior Israel. The obligations under the
Revolving Credit Facility are without recourse to Alpine. Unless previously
accelerated as a result of default, the Revolving Credit Facility matures in
December 2007. However, in accordance with Emerging Issues Task Force Issue
95-22, Balance Sheet Classification of Borrowings outstanding under Revolving
Credit Agreements That Include Both a Subjective Acceleration Clause and a
Lock-Box Arrangement, borrowings under the Revolving Credit Facility have been
classified as a current liability.
The Companies may terminate the Revolving Credit Facility at any time
upon 45 days prior written notice and payment of all outstanding borrowings,
together with unpaid interest, and a termination fee equal to 0.75% of the
maximum committed amount. At any time after December 11, 2004, the Companies
may, upon 30 days prior written notice, permanently reduce the maximum committed
amount without penalty or premium. At June 30, 2004 and December 31, 2003,
outstanding borrowings under the Revolving Credit Facility were $31.7 million
and $17.2 million, respectively. At June 30, 2004, the Companies had $18.0
million of borrowing availability. No dividends may be paid by Alpine Holdco
without prior consent of the lenders. On July 29, 2004 the lenders expressly
consented to the distribution by Alpine Holdco to Alpine of the sale proceeds
from the DNE Sale.
8. LONG-TERM DEBT
At June 30, 2004 and December 31, 2003, long-term debt consists of the
following:
JUNE 30, DECEMBER 31,
2004 2003
--------------------------
(IN THOUSANDS)
6% Junior Subordinated Notes, net of $1.2 million discount.... $3,147 $3,059
Other......................................................... 416 855
---------- -----------
3,563 3,914
Less current portion of long-term debt........................ 54 137
---------- -----------
$3,509 $3,777
========== ===========
On August 4, 2003, the Company completed an exchange offer whereby
holders of its common stock exchanged 3,479,656 shares for $4.3 million
principal amount of 6% Junior Subordinated Notes (the "Subordinated Notes")
issued by the Company plus a nominal amount of cash in lieu of fractional notes.
The Subordinated Notes were initially recorded at an amount equal to the fair
value of the common stock exchanged resulting in an initial discount of $1.4
million. The discount is being accreted over the term of the Subordinated Notes
using the effective interest rate method. The Subordinated Notes accrue interest
at 6% per annum payable in cash semiannually each December 31 and June 30. The
Subordinated Notes are the Company's general unsecured obligations subordinated
and subject in right of payment to all of the Company's existing and future
senior indebtedness, which excludes trade payables incurred in the ordinary
course of business. The Company will be required to repay one-eighth of the
outstanding principal amount of the Subordinated Notes commencing on June 30,
2007 and semiannually thereafter, so that all of the Subordinated Notes will be
repaid by December 31, 2010. The Subordinated Notes are redeemable, at the
Company's option, in whole at any time or in part from time to time, at the
principal amount to be redeemed plus accrued and unpaid interest thereon to the
redemption date, together with a premium if the Subordinated Notes are redeemed
prior to 2007. In addition, the Company must offer to redeem all of the
Subordinated Notes at the redemption price then in effect in the event of a
change of control. The Subordinated Notes were issued under an indenture which
does not subject the Company to any financial covenants.
The "Other" debt caption represents a loan established in 1999 with
Raytheon Aircraft Credit Corporation to finance the purchase of a 12.5% interest
in an aircraft. The loan is payable monthly through May 2011.
9. SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
On June 23, 2003 the Company completed a private placement of 8,287
shares of a new issue of Series A Cumulative Convertible Preferred Stock (the
"Series A Preferred Stock") to its directors and certain officers for a purchase
price of $380 per share, or an aggregate of approximately $3.1 million. Holders
of the Series A Preferred Stock are entitled to receive, when, as and if
declared by the board of directors out of funds legally available for payment,
cash dividends at an annual rate of $30.40 per share. Each share of Series A
Preferred Stock is convertible at the option of the holder into 691 shares of
Alpine common stock from and after November 11, 2003; provided that the
13
purchasing officers and directors have agreed not to convert until such time as
they are advised by the Company that it has a sufficient number of authorized
but unissued shares of common stock of the Company to permit such conversion.
The Company may cause conversion of the Series A Preferred Stock into common
stock after March 31, 2004, if the Company's common stock is then listed on the
New York Stock Exchange or the American Stock Exchange or is traded on the
Nasdaq National Market System and the average closing price of a share of the
Company's common stock for any 20 consecutive trading days equals or exceeds
300% of the conversion price then in effect. The Series A Preferred Stock is
subject to mandatory redemption by the Company ratably on the last day of each
quarter during the three-year period commencing on December 31, 2009 at the
liquidation value of $380 per share, plus accrued and unpaid dividends.
Additionally, if the Company experiences a change in control it will, subject to
certain limitations, offer to redeem the Series A Preferred Stock at a cash
price of $380 per share plus (i) accrued and unpaid dividends and (ii) if the
change of control occurs prior to December 31, 2007, all dividends that would be
payable from the redemption date through December 31, 2007.
Holders of the Series A Preferred Stock are entitled to vote their
shares on an as-converted basis together with the Company's common stockholders.
In addition, the Company may not (a) enter into a merger, sale of all or
substantially all of its assets or similar transaction without the approval of
holders of at least a majority of the shares of Series A Preferred Stock, or (b)
alter or change the powers, preferences or special rights (including, without
limitation, those relating to dividends, redemption, conversion, liquidation
preference or voting) of the shares of Series A Preferred Stock so as to affect
them materially and adversely, or issue any senior stock, without the approval
of holders of at least a majority of the shares of Series A Preferred Stock. In
the event of any liquidation, dissolution or winding up of Alpine, after the
payment of the liquidation preference in respect of any senior stock, holders of
the Series A Preferred Stock will be entitled to receive the liquidation price
of $380 per share plus an amount equal to (a) if the liquidation, dissolution or
winding up occurs prior to December 31, 2007, all dividends that would be
payable on a share of Series A Preferred Stock from the date of liquidation,
dissolution or winding up through December 31, 2007 and (b) any accrued and
unpaid dividends to the payment date, before any payment is made to the holders
of common stock or any other junior securities, subject to certain exceptions.
On November 10, 2003, the Company completed the sale of 9,977 shares of
Series A Preferred Stock pursuant to a rights offering to holders of the
Company's common stock. Holders of the Company's common stock were offered a
right to purchase one share of Series A Preferred Stock at a price of $380 per
share for each 500 shares of common stock held on September 29, 2003. The terms
of the Series A Preferred Stock are the same as that purchased by the officers
and directors in the private placement discussed in the preceding paragraph
except that the purchased shares of Series A Preferred stock are currently
convertible. Total proceeds received from the sale were $3.8 million.
During the three and six month periods ended June 30, 2004 there were
1,076 and 1,091 shares of Series A Preferred Stock, respectively, converted to
743,516 and 753,881 shares of the Company's common stock, respectively.
10. INCOME (LOSS) PER SHARE
The computation of basic and diluted income (loss) per share for the
three months ended June 30, 2004 and 2003 is as follows:
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
2004 2003
------------------------------------ ---------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET LOSS SHARES AMOUNT
---------- ---------- -------- ---------- ------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Loss from continuing operations .................. $ (746) $ (0.06) $ (4,628) $ (0.31)
Income from discontinued operations .............. 892 0.07 854 0.06
---------- ---------- -------- ---------- ------- ----------
Net income (loss) ................................ 146 0.01 $ (3,774) (0.25)
Less: preferred stock dividends .................. (139) (0.01) (10)
---------- ---------- -------- ---------- ------- ----------
Basic and diluted income (loss) per common share . $ 7 12,815 $ 0.00 $ (3,784) 15,107 $ (0.25)
========== ========== ======== ========== ======= ==========
14
The computation of basic and diluted income (loss) per share for the
six months ended June 30, 2004 and 2003 is as follows:
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
2004 2003
------------------------------------ ---------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET LOSS SHARES AMOUNT
---------- ---------- -------- ---------- ------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income (loss) from continuing operations ......... $ 27 $ 0.00 (7,668) (.51)
Income from discontinued operations .............. 1,595 0.13 1,580 .10
---------- ---------- -------- ---------- ------- ----------
Net income (loss) ................................ $ 1,622 0.13 $ (6,088) (.41)
Less: preferred stock dividends .................. (287) (0.02) (19)
---------- ---------- -------- ---------- ------- ----------
Basic and diluted income (loss) per common share . $ 1,335 12,467 $ 0.11 $ (6,107) 15,019 $ (0.41)
========== ========== ======== ========== ======= ==========
The Company has excluded the assumed conversion of the Series A
Preferred Stock from the diluted earnings per share calculation for all periods
as the impact would be anti-dilutive. Stock options and unvested stock awards
that may be exercised in the future, with respect to 3.3 million and 2.4 million
shares of common stock outstanding at June 30, 2004 and 2003, respectively, have
been excluded from the computation of diluted earnings per share because to do
so would be antidilutive for all periods presented. The dilutive impact of the
warrant held by Superior (to acquire common shares of Essex Electric) is
estimated to be minimal for the three and six months ended June 30, 2004 and
antidilutive for the three and six months ended June 30, 2003.
11. BUSINESS SEGMENTS
The Company's reportable segments prior to second quarter 2004 consisted of
electrical wire (Alpine's 90% owned subsidiary, Essex Electric Inc) and
communications and electronic products (DNE). During the second quarter 2004, we
classified the communications and electronic products segment as discontinued
operations. See Note 12 for additional information about our discontinued
operations. Subsequent to the classification of DNE as discontinued operations,
the Company has only one business segment.
12. DISCONTINUED OPERATIONS
On June 21, 2004 the Company entered into an agreement to sell DNE
Systems, its wholly-owned defense electronics subsidiary, to ULTRA Electronics
Defense, Inc., a wholly-owned subsidiary of Ultra Electronics Holdings plc, a
United Kingdom-based company that is listed on the London Stock Exchange (the
"DNE Sale"). The purchase price is $40 million in cash at closing plus the
Company may receive an additional cash payment of up to $3 million if a certain
performance based measure is achieved in 2005. The sale was consummated on July
29, 2004 and a pretax book gain of approximately $30 million, net of expenses,
is expected to be recorded in the third quarter of 2004. The assets and
liabilities of DNE have been reclassified to discontinued operations in the June
30, 2004 and December 31, 2003 balance sheets presented herein. Likewise, DNE's
results of operations for the three and six month periods ended June 30, 2004
and 2003 have been reclassified to income from discontinued operations.
15
The major components of DNE's assets and liabilities classified as
discontinued operations in the June 30, 2004 and December 31, 2003 balance
sheets herein are presented below:
JUNE 30, DECEMBER 31,
2004 2003
-----------------------------------
(IN THOUSANDS)
Accounts receivable....................... $3,484 $2,232
Inventories............................... 5,434 5,118
Other current assets...................... 764 184
----------------------------------
Total current assets................. 9,682 7,534
Property, plant and equipment, net........ 1,896 1,766
----------------------------------
Total assets.......................... 11,578 9,300
Accounts payable.......................... 1,528 765
Accrued expenses.......................... 1,109 1,458
----------------------------------
Total current liabilities............. 2,637 2,223
Other long term liabilities............... 149 157
----------------------------------
Total liabilities...................... 2,786 2,380
----------------------------------
Total net assets.......................... $8,792 $6,920
==================================
The revenue and income before taxes of DNE that is classified in discontinued
operations for the three and six month periods ended June 30, 2004 and 2003 are
presented below:
THREE MONTHS ENDED JUNE 30: SIX MONTHS ENDED JUNE 30:
--------------------------- -------------------------
(IN THOUSANDS)
--------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues................ $ 6,808 $7,109 $13,704 $15,297
Income before taxes..... $ 1,564 $1,450 $ 2,769 $ 2,723
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Alpine Group, Inc. ("Alpine") is a holding company which over the
past five years has owned controlling equity interests in industrial businesses
which have been operated as subsidiaries. Alpine currently owns approximately
90% of Essex Electric Inc. ("Essex Electric"), which is engaged in the
manufacture and sale of electrical wire.
On December 11, 2002, Alpine's wholly-owned subsidiary, Alpine Holdco
Inc. ("Alpine Holdco") acquired Essex Electric and DNE Systems, Inc ("DNE
Systems") from Superior TeleCom Inc. ("Superior") and all of the outstanding
shares of capital stock of Texas SUT Inc. and Superior Cable Holdings (1997)
Ltd., which together own approximately 47% of Superior Cables Ltd., the largest
Israeli based producer of wire and cable products, which we sometimes refer to
as "Superior Israel". The purchase included the issuance of a warrant (the
"Warrant") to Superior to purchase 199 shares of the common stock of Essex
Electric Inc. We sometimes refer to this acquisition as the "Electrical
Acquisition". In September 2003, Alpine Holdco subscribed for and purchased 681
newly issued shares of common stock of Essex Electric. In October 2003, Superior
exercised its rights under a securityholders agreement to subscribe for and
purchase 169 shares of newly issued common stock of Essex Electric. As a result
Alpine Holdco and Superior currently own approximately 90% and 10%,
respectively, of the total outstanding stock of Essex Electric. Superior's
Warrant to purchase 199 shares of the capital stock of Essex Electric currently
represents approximately 9.9% of the capital stock of Essex Electric. On June
18, 2004, Alpine entered into an agreement to sell DNE Systems. The transaction
closed on July 29, 2004. Accordingly, DNE Systems has been accounted for and
classified as a discontinued operation in these financial statements. See note
12 for a description of this transaction.
IMPACT OF COPPER PRICE FLUCTUATIONS ON OPERATING RESULTS
Copper is one of the principal raw materials used by the Company.
Fluctuations in the price of copper affect per unit product pricing and related
revenues. However, the cost of copper has not had a material impact on
profitability as the Company, in most cases, has the ability to adjust prices
billed for its products to properly match the copper cost component of its
inventory shipped.
17
RESULTS OF OPERATIONS--THREE MONTH PERIOD ENDED JUNE 30, 2004 AS COMPARED TO THE
THREE MONTH PERIOD ENDED JUNE 30, 2003
Sales for the quarter ended June 30, 2004 were $76.7 million, a
decrease of 4% compared to sales of $80.2 million for the quarter ended June 30,
2003. The comparative sales decrease is due to lower shipments of electrical
wire by Essex Electric resulting from its consolidation of production facilities
and reduction of manufacturing capacity to reduce its exposure to certain
geographic markets, distribution channels and product lines during
implementation of its restructuring and repositioning strategy. The sales
decrease during the second quarter of 2004 versus the second quarter of 2003 was
partially offset by a significant increase (61%) in the cost of copper, Essex
Electric's principal manufacturing cost item. After adjusting for and
eliminating the comparative difference in the market price of copper, sales for
the quarter ended June 30, 2004 declined 31% from the quarter ended June 30,
2003 due primarily to a decrease in the volume of copper equivalent pounds
shipped partially offset by an improvement in per unit pricing. The volume
decline was anticipated and is due largely to the impact of the restructuring
and repositioning program being implemented at Essex Electric.
Gross profit for the quarter ended June 30, 2004 was $6.6 million, a
25% increase of $1.3 million as compared to gross profit of $5.3 million for the
quarter ended June 30, 2003. The gross profit margin for the quarter ended June
30, 2004 was 9%, compared to a gross profit margin of 7% for the quarter ended
June 30, 2003. The increased margin percentage reflects higher pricing and mix
changes in products and markets in which Essex Electric competes.
Selling, general and administrative expense ("SG&A expense") for the
quarter ended June 30, 2004 was $6.0 million, a decrease of 29%, as compared to
SG&A expense of $8.4 million for the quarter ended June 30, 2003 due primarily
to cost reductions at Essex Electric in connection with implementation of its
restructuring. Included in SG&A expense for the quarter ended June 30, 2004 is
approximately $0.5 million of expense related to accounting for certain stock
options on a variable accounting basis. Excluding this charge, SG&A expense for
the quarter ended June 30, 2004 decreased by 35% from the 2003 comparable
quarter.
Restructuring and other charges at Essex Electric of $1.2 million for
the three months ended June 30, 2004 are described in Note 6.
The Company's operating loss for the quarter ended June 30, 2004 was
$0.6 compared to an operating loss of $5.5 million for the comparable 2003
quarter. The increase in operating income is due to higher pricing, product mix
changes and SG&A expense reductions at Essex Electric.
Interest expense for the quarter ended June 30, 2004 was $0.7 million,
representing a decrease of $0.1 million from the comparative 2003 quarter
period. The decrease is due primarily to a decrease of approximately $8.0
million in the average borrowings under the Revolving Credit Facility offset
partially by the interest expense on the 6% Junior Subordinated Notes issued in
August 2003.
18
RESULTS OF OPERATIONS--SIX MONTH PERIOD ENDED JUNE 30, 2004 AS COMPARED TO THE
SIX MONTH PERIOD ENDED JUNE 30, 2003
Sales for the six month period ended June 30, 2004 were $158.0 million,
a decrease of 7% compared to sales of $170.0 million for the six month period
ended June 30, 2003. The comparative sales decrease is due to lower shipments of
electrical wire by Essex Electric resulting from its consolidation of production
facilities and reduction of manufacturing capacity to reduce its exposure to
certain geographic markets, distribution channels and product lines during the
implementation of its restructuring and repositioning initiatives. The sales
decrease was also impacted by the sale of the automotive and industrial wire
product lines in the first quarter of 2003, which contributed approximately $8.0
million in sales in the first quarter of 2003. The sales decrease was partially
offset by the significant increase (58%) in the cost of copper, Essex Electric's
principal manufacturing cost item, in the first half of 2004 compared to the
copper costs in the first half of 2003. After adjusting for and eliminating the
comparative difference in the market price of copper, sales for the six month
period ended June 30, 2004 declined 31% from the six month period ended June 30,
2003 due to a decline in the volume of copper equivalent pounds shipped
partially offset by an improvement in per unit pricing. The volume decline was
anticipated and is due largely to the impact of the restructuring and
repositioning program being implemented at Essex Electric.
Gross profit for the six month period ended June 30, 2004 was $16.8
million, a 43% increase of $5.7 million as compared to gross profit of $11.1
million for the six month period ended June 30, 2003. The gross profit margin
for the six month period ended June 30, 2004 was 11%, compared to a gross profit
margin of 7% for the six month period ended June 30, 2003. The increased margin
percentage reflects higher pricing and mix changes in products and markets in
which Essex Electric competes.
Selling, general and administrative expense ("SG&A expense") for the
six month period ended June 30, 2004 was $12.1 million, a decrease of 30%, as
compared to SG&A expense of $17.4 million for the six month period ended June
30, 2003 due primarily to cost reductions at Essex Electric in connection with
implementation of its restructuring. Included in SG&A expense for the six month
period ended June 30, 2004 is approximately $0.7 million of expense related to
accounting for certain stock options on a variable accounting basis. Excluding
this charge, SG&A expense for the six month period ended June 30, 2004 decreased
by 34% from the 2003 comparable period.
Restructuring and other charges at Essex Electric of $2.9 million for
the six month period ended June 30, 2004 are described in Note 6.
The Company's operating income for the six month period ended June 30,
2004 was $1.8 million compared to an operating loss of $11.3 million for the
comparable 2003 period. The increase in operating income is due to higher
pricing, product mix changes and SG&A expense reductions at Essex Electric.
Interest expense for the six month period ended June 30, 2004 was $1.3
million, representing a decrease of $0.6 million from the prior year six month
period. The decrease is due primarily to a decrease of approximately $24.0
million in the average borrowings under the Revolving Credit Facility offset
partially by the interest expense on the 6% Junior Subordinated Notes issued in
August 2003.
19
LIQUIDITY AND CAPITAL RESOURCES
ALPINE HOLDCO
The Electrical Acquisition was financed by approximately $10 million of
Alpine's cash and cash equivalents and borrowings by Alpine Holdco under a Loan
and Security Agreement (the "Revolving Credit Facility"), dated as of December
11, 2002, by and among Alpine Holdco, Essex Electric, DNE Manufacturing Company
and DNE Technologies, Inc. as borrowers and DNE Systems as credit party (such
parties sometimes collectively are called the "Companies"), certain financial
institutions party thereto as lenders, Congress Financial Corporation, as
documentation agent, and Foothill Capital Corporation, as arranger and
administrative agent. Upon consummation of the acquisition, approximately $78
million was outstanding under the Revolving Credit Facility. The Revolving
Credit Facility was last amended on December 8, 2003.
Effective concurrently with the consummation of the DNE Sale (see note
12) on July 29, 2004, the lenders, released each of DNE Systems, DNE
Technologies, and DNE Manufacturing from all of their obligations under the
Revolving Credit Facility (the "DNE Parties"), released all property of the DNE
Parties from the liens granted for the benefit of the lenders under the
Revolving Credit Facility and all of the outstanding and issued capital stock of
the DNE Parties from the pledge thereof delivered in connection with the
Revolving Credit Facility, and the DNE Parties no longer are "Borrowers" or a
"Credit Party", as the case may be, under the Revolving Credit Facility.
Accordingly, from and after July 29, 2004, the DNE Parties are not included in
the term "Companies".
Subsequent to the closing of the DNE Sale, it is anticipated that the
Revolving Credit Facility will be amended to reflect modifications in covenants
and other aspects of the Loan Agreement impacted as a result of the DNE Sale.
The terms of the Revolving Credit Facility provided for a maximum
committed amount of $100 million at its inception which, at the request of the
Companies, was reduced to $70 million on December 8, 2003. Borrowing
availability is determined by reference to a borrowing base which permits
advances to be made at various net valuation rates against various assets of the
Companies. Interest is payable monthly in cash in arrears and is based on, at
Alpine Holdco's option, LIBOR or prime rate plus a fixed margin. The weighted
average interest rate at June 30, 2004 was 4.9%. The Revolving Credit Facility
also provides for maintenance of financial covenants and ratios relating to
minimum EBITDA and tangible net worth, and includes restrictions on capital
expenditures, payment of cash dividends and incurrence of indebtedness.
Outstanding obligations under the Revolving Credit Facility are secured by a
lien on all of the Companies' tangible and intangible assets, other than the
investment in Superior Israel and the assets of DNE, as described above. The
obligations under the Revolving Credit Facility are without recourse to Alpine.
Unless previously accelerated as a result of default, the Revolving Credit
Facility matures in five years. However in accordance with Emerging Issues Task
Force Issue 95-22, Balance Sheet Classification of Borrowings outstanding under
Revolving Credit Agreements That Include Both a Subjective Acceleration Clause
and a Lock-Box Arrangement, borrowings under the Revolving Credit Facility have
been classified as a current liability. The Companies may terminate the
Revolving Credit Facility at any time upon 45 days prior written notice and
payment of all outstanding borrowings, together with unpaid interest, and a
termination fee equal to 0.75% of the maximum committed amount. At any time
after December 11, 2004, the Companies may, upon 30 days prior written notice,
permanently reduce the maximum committed amount without penalty or premium. At
June 30, 2004 and December 31, 2003, outstanding borrowings under the Revolving
Credit Facility were $31.7 million and $17.2 million, respectively. At June 30,
2004 the Companies had $18.0 million of borrowing availability. No dividends may
be paid by Alpine Holdco without prior consent of the lenders. On July 29, 2004
the lenders expressly consented to the distribution by Alpine Holdco to Alpine
of the sale proceeds from the DNE Sale. Alpine Holdco was in compliance with all
applicable covenants at June 30, 2004.
The Company estimates that Alpine Holdco (including its subsidiaries)
capital expenditures for 2004 will approximate between $6 to $8 million. Essex
Electric has implemented restructuring initiatives to rationalize manufacturing
capacity, lower expenditures and reduce working capital, which are expected to
result in costs of approximately $6 million during 2004. Incurrence of these
costs is permissible under the terms of the Revolving Credit Facility. Based
upon the amended terms of the Revolving Credit Facility and the projected
performance of the Companies, Alpine believes that the Companies will be in
compliance with the financial covenants provided for thereunder. However, in the
event of any noncompliance under the Revolving Credit Facility, Alpine believes
that it would be able to obtain the necessary waivers from its lenders.
Furthermore, if necessary, Alpine believes it could obtain refinancing on terms
and conditions generally consistent or in the aggregate, similar to those
contained in the Revolving Credit Facility. However, there can be no assurance
that Alpine can obtain such waivers or that alternate financing would be
available. Alpine believes that existing cash and cash equivalents, cash
provided by operations and anticipated working capital reductions together with
borrowings available under the Revolving Credit Facility will be sufficient to
meet the capital needs of the Companies over the next twelve months.
20
ALPINE CORPORATE
On August 4, 2003, the Company completed an exchange offer whereby
holders of its common stock exchanged 3,479,656 shares for $4.3 million
principal amount of 6% Junior Subordinated Notes (the "Subordinated Notes")
issued by the Company plus a nominal amount of cash in lieu of fractional notes.
The Subordinated Notes were initially recorded at an amount equal to the fair
market value of the common stock exchanged resulting in an initial discount of
$1.4 million. The discount is being accreted over the term of the Subordinated
Notes using a level interest method. The Subordinated Notes accrue interest at
6% per annum payable in cash semiannually each December 31 and June 30. The
Subordinated Notes are the Company's general unsecured obligations, subordinated
and subject in right of payment to all of the Company's existing and future
senior indebtedness, which excludes trade payables incurred in the ordinary
course of business. The Company will be required to repay one-eighth of the
outstanding principal amount of the Subordinated Notes commencing on June 30,
2007 and semiannually thereafter, so that all of the Subordinated Notes will be
repaid by December 31, 2010. As such, there are no principal payments due in
2004. The Company must offer to redeem all of the Subordinated Notes at the
redemption price then in effect in the event of a change of control. The
Subordinated Notes were issued under an indenture that does not subject the
Company to any financial covenants.
On June 23, 2003, Alpine completed a private placement of 8,287 shares
of a new issue of Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock") to its directors and certain officers for a purchase price of
$380 per share, or an aggregate of approximately $3.1 million. Holders of the
Series A Preferred Stock are entitled to receive, when, as and if declared by
the board of directors out of funds legally available for payment, cash
dividends at an annual rate of $30.40 per share. Each share of Series A
Preferred Stock is convertible at the option of the holder into 691 shares of
Alpine common stock beginning on November 11, 2003. However, the officers and
directors have agreed not to exercise the convertible option until advised by
the Company that it has a sufficient number of authorized but unissued shares of
common stock to permit such conversion. Since the market price of the common
stock on the commitment date (June 23, 2003) was $0.76 per share and the
conversion price is $0.55 per share, a beneficial conversion feature of $1.2
million was recorded as a reduction to the Mandatory redeemable series A
cumulative preferred stock line of the balance sheet with the offset to capital
in excess of par. The conversion feature will be recorded as a dividend at the
time there are a sufficient number of authorized but unissued shares of common
stock to permit such conversion. The Company may cause conversion of the Series
A Preferred Stock into common stock if the Company's common stock is then listed
on the New York Stock Exchange or the American Stock Exchange or is traded on
the Nasdaq National Market System and the average closing price of a share of
the Company's common stock for any 20 consecutive trading days equals or exceeds
300% of the conversion price then in effect. The Series A Preferred Stock is
subject to mandatory redemption by the Company ratably on the last day of each
quarter during the three-year period commencing on December 31, 2009 at the
liquidation value of $380 per share, plus accrued and unpaid dividends.
Additionally, if the Company experiences a change in control it will, subject to
certain limitations, offer to redeem the Series A Preferred Stock at a cash
price of $380 per share plus (i) accrued and unpaid dividends and (ii) if the
change of control occurs prior to December 31, 2007, all dividends that would be
payable from the redemption date through December 31, 2007.
Holders of the Series A Preferred Stock are entitled to vote their
shares on an as-converted basis together with the Company's common stockholders.
In addition, the Company may not (a) enter into a merger, sale of all or
substantially all of its assets or similar transaction without the approval of
holders of at least a majority of the shares of Series A Preferred Stock, or (b)
alter or change the powers, preferences or special rights (including, without
limitation, those relating to dividends, redemption, conversion, liquidation
preference or voting) of the shares of Series A Preferred Stock so as to affect
them materially and adversely, or issue any senior stock, without the approval
of holders of at least a majority of the shares of Series A Preferred Stock. In
the event of any liquidation, dissolution or winding up of Alpine, after the
payment of the liquidation preference in respect of any senior stock, holders of
the Series A Preferred Stock will be entitled to receive the liquidation price
of $380 per share plus an amount equal to (a) if the liquidation, dissolution or
winding up occurs prior to December 31, 2007, all dividends that would be
payable on a share of Series A Preferred Stock from the date of liquidation,
dissolution or winding up through December 31, 2007 and (b) any accrued and
unpaid dividends to the payment date, before any payment is made to the holders
of common stock or any other junior securities, subject to certain exceptions.
Proceeds from the sale of the Series A Preferred Stock were used to reduce
existing indebtedness and for general corporate purposes.
On November 10, 2003, the Company completed the sale of 9,977 shares of
Series A Preferred Stock pursuant to a rights offering to holders of the
Company's common stock. Holders of the Company's common stock were offered a
right to purchase one share of Series A Preferred Stock at a price of $380 per
share for each 500 shares of common stock held on September 29, 2003. The terms
of the Series A Preferred Stock are the same as that purchased by the officers
and directors in the private placement discussed above; however the Series A
Preferred Stock purchased through the rights offering are currently convertible.
Total proceeds received from the sale were $3.8 million. The recording of
dividends, if any, on the Series A Preferred Stock will reduce the Company's
earnings per share in the period recorded. Since the market price of the common
stock on the date of issuance (November 10, 2003) was $0.92 per share and the
conversion price is $0.55 per share, a beneficial conversion feature of $2.6
million was recorded. This was recorded as a dividend since the shares were
immediately convertible, offset with a credit to capital in excess of par.
21
During the three month period ended June 30, 2004, the Company retired
250 shares of its 9% cumulative convertible senior preferred stock at its stated
liquidation value of $1,000 per share.
As of June 30, 2004 Alpine has unrestricted cash, cash equivalents and
marketable securities of approximately $6.6 million. Alpine's current and
anticipated sources of liquidity include existing cash and cash equivalents
(including the net proceeds from the DNE Sale), and management fees from Alpine
Holdco. Pursuant to a management agreement with Alpine Holdco dated December 11,
2002, so long as no event of default exists or is created by such payment under
the Revolving Credit Facility, Alpine is entitled to receive from Alpine Holdco
an annual management fee (together with any unpaid management fees from prior
years), which was increased from $1.0 million to $1.8 million, (effective
January 1, 2004) and is reimbursed for all direct costs incurred by it related
to the business of Alpine Holdco. Alpine's ability to receive distributions from
Alpine Holdco is restricted under the terms of the Revolving Credit Facility to
a maximum of $1.8 million of the aforementioned management fee, amounts
representing Alpine's tax liability in respect of the operations of Alpine
Holdco, plus $250,000 per year.
On July 29, 2004, Alpine Holdco distributed to Alpine the proceeds from
the DNE Sale, net of expenses, of approximately $37 million in accordance with
the consent from the lenders previously described.
Since 1993, Alpine has been a party to a guaranty of Superior's lease
obligations relating to Superior's manufacturing facility in Brownwood, Texas.
The lease currently provides for monthly payments of $56,000 subject to
adjustments for changes in the consumer price index. The lease term expires in
2018 but may be extended through 2033. As such, the maximum potential amount of
future payments under the guaranty through 2018 would be approximately $10
million. Any further extensions would amount to a guarantee of approximately
$0.7 million per year. While Alpine's continuing obligations, if any, under the
guaranty are not free from doubt, the Company believes the facility and
underlying lease are valuable assets of Superior and expects that Superior will
perform as tenant thereunder and continue to pay its obligations. In addition,
Alpine would have a claim for indemnification and reimbursement from Superior in
respect of any amounts paid by Alpine as guarantor.
Superior Israel's operations are funded and financed separately, with
recourse to Superior Israel but otherwise on a non-recourse basis to Alpine.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk primarily relates to interest
rates on long-term debt and copper futures used to minimize the price risk
associated with copper prices. The cost of copper, the Company's most
significant raw material has been subject to significant volatility over the
past several years. At December 31, 2003, the Company had approximately $13
million of copper futures contracts, representing 12 million copper pounds,
outstanding as non-designated derivative instruments. These contracts were
entered into to hedge 12 million copper pounds of inventory purchased in
December 2003, for sale in the first quarter of 2004. These contracts were
recorded at fair value at December 31, 2003 with any price fluctuations
reflected in current earnings in 2003, and were liquidated in the first quarter
of 2004, when the underlying asset (i.e. inventory) was sold.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form
10-Q, an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures was carried out by the Company
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures have been designed and are
being operated in a manner that provides reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms. A
system of controls, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the system of controls are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected. There have
been no changes in the Company's internal control over financial reporting that
occurred during the most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
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Except for the historical information herein, the matters discussed in
this Form 10-Q include forward-looking statements that may involve a number of
risks and uncertainties. Actual results may vary significantly based on a number
of factors, including, but not limited to, risks in product and technology
development, market acceptance of new products and continuing product demand,
prediction and timing of customer orders, the impact of competitive products and
pricing, changing economic conditions, including changes in short-term interest
rates and other risk factors detailed in the Company's most recent filings with
the Securities and Exchange Commission.
23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) EXHIBITS
10(gg)* Stock Purchase Agreement Between Alpine Holdco Inc. and Ultra
Electronics Defense, Inc., Dated as of June 18, 2004
31.1* Certification of the Company's Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of the Company's Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32* Certification of the Company's Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K None
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* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ALPINE GROUP, INC.
Date:August 12, 2004
By: /s/ David A. Owen
-------------------------------------
David A. Owen
Chief Financial Officer
(duly authorized officer and principal
financial and accounting officer)
25